Michael Keenan (Stirling, Liberal Party, Shadow Assistant Treasurer) Share this | Link to this | Hansard source

I rise to speak on the International Tax Agreements Amendment Bill (No. 1) 2008. It is a relatively straightforward piece of legislation that has the full support of the opposition. The legislation gives effect in law to a new tax treaty with Japan. The new tax treaty, which updates an older treaty, was negotiated and the detail was concluded by the coalition government before the change of government in November last year.

Before I go into the substance of the bill, I just want to make a few comments about the importance of our relationship with Japan. I think it is important for members in this place to remember that Japan is one of our most important allies. It is, of course, our largest trading partner, although in many ways now you hear so much more about China. I am not trying to set up Japan in opposition to China or anything like that, because China remains terribly important for Australia’s future, but it should be noted that Japan is our largest trading partner. In Western Australia it was actually the Japanese demand for resources that resulted in the opening up of the Pilbara. Those great economic advances in Western Australia were something that Sir Charles Court pursued very readily in his time as a minister and Premier. He established excellent relationships with Japanese political figures and business figures that opened up the north-west of Western Australia. That Japanese influence is extremely important for the whole of the Australian economy.

Moves to improve our economic relationship, such as this bill which updates a tax treaty, are very important for Australia’s national interest and they have the full support of the opposition. This bill amends the International Tax Agreements Act 1953 to incorporate into Australian law the Convention between Australia and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income. This convention replaces the Agreement between the Commonwealth of Australia and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income that was signed in Canberra on 20 March 1969. This was obviously at a time when the Australia-Japan relationship, while strong, was not as strong as it is today and it makes sense that this treaty be updated to take into account changes in our respective laws. This new treaty was agreed in principle on 3 August 2007 between the then Treasurer, the Hon. Peter Costello, and the Japanese finance minister, Koji Omi—and I apologise if that is not a particularly good pronunciation. The convention is based on the OECD model tax convention and is generally consistent with other tax treaties that have been concluded by Australia, including treaties we have with the United States and other important trading partners.

The previous treaty no longer reflected the developments in the economic relationship between Australia and Japan, and those developments of course are numerous and vitally important to Australia’s interests. So in recognition of this the coalition government undertook a series of negotiations in 2007 to comprehensively revise the previous convention. The commencement of negotiations by the coalition government illustrates our commitment to encouraging foreign investment and encouraging opportunities for Australian businesses in overseas markets.

Australia and Japan share a mutual understanding. I have had the opportunity to visit Japan on a number of occasions in a personal capacity and an official capacity. We are both market based liberal democracies. Our countries have a very longstanding relationship. In Japan there is a very strong recognition of the importance of Australia to their economic wellbeing, which is obviously reflected in Australia.

Since 1969 when the original treaty was concluded, Japan has been Australia’s largest export market. I think that is very important. Japan remains Australia’s largest trading partner. Japan is also Australia’s third largest source of foreign investment, and that foreign investment has been crucial, as I outlined earlier, for the resources, tourism and manufacturing sectors. Japanese investment, as I said, was vital in opening up those northern parts of Western Australia.

I am optimistic that the agreement on this convention will encourage ongoing negotiations towards a free trade agreement with Japan. This has been something that has been on the agenda for many years. Negotiations, I think it is fair to say, have been patchy. I think initially there was probably more enthusiasm for this treaty in Australia than might have been met with by our Japanese counterparts, but I detect that the mood is rapidly changing. I think it is terribly important that we do conclude this free trade agreement once and for all with our largest trading partner.

The convention updates the previous convention by providing for reduced rates of withholding tax on dividends, interest and royalties; improved integrity measures; and new rules for real property which bring the capital gains tax treatment into line with that of the OECD. The convention has a number of key changes from the previous convention, such as: the inclusion of anti-treaty-shopping provisions in relation to withholding tax rates on dividends, interest and royalties; the inclusion of a limitation on the benefits clause to ensure treaty benefits pass only to qualified persons; rules to prevent tax discrimination; specific provisions for the taxation of business profits from natural resource activities, building sites and the operation of substantial equipment; specific provisions relating to the taxation of income derived through business trusts; provisions preventing double exemption of income derived by temporary residence; and provisions that will encourage the cross-border movement of people, capital and technology between Australia and Japan.

The convention also facilitates increased cooperation between the Australian and Japanese tax authorities to reduce fiscal evasion. The convention will encourage the growth of Australian and Japanese enterprises by making it easier to obtain intellectual property equity and finance. The convention will reduce complexity and compliance costs for Australian businesses and their Japanese counterparts. This convention will lead to real economic benefits for both our economies and will build on the strong relationship between Australia and Japan. I think this is a non-controversial bill, but it is a terribly important bill and it will enhance one of our most important relationships. I commend it very heartily to the House. I congratulate the previous Treasurer for concluding the detail of this particular treaty and I urge all members to support it.

Jason Clare (Blaxland, Australian Labor Party) Share this | Link to this | Hansard source

I rise to support the International Tax Agreements Amendment Bill (No. 1) 2008. This bill will strengthen the strong ties Australia enjoys with Japan, and I take this opportunity to focus in this debate on the strength and the importance of this relationship. This century is the century of the Asia-Pacific. Our region will become more important to global growth and security than ever before. Paul Keating once warned that if you do not succeed in the Asia-Pacific you succeed nowhere. Our relationship with Japan is integral to Australia’s achieving success in the Asia-Pacific area.

This bill is one of many steps this government is taking to ensure that. It is Australia’s second comprehensive tax treaty with Japan. It will modernise the tax relationship between the two countries and will serve to facilitate trade and investment between Australia and Japan. The relationship between Australia and Japan is forged on many levels. Firstly, the two nations share many similarities. We share common values. We are both great democracies. We both share very similar values also on the direction that East Asia should take, having agreed to work together to strengthen various regional forums, including the Asia-Pacific Economic Cooperation, or APEC; the ASEAN Regional Forum, or ARF; and the East Asia Summit, or EAS. We share the common goal of promoting peace, security, prosperity, development and sustainability in the Asia-Pacific region.

Perhaps the strongest relationship we enjoy is through economic ties. We are lucky in Australia, as we have one of the most resource rich continents, from the iron ore mines in the Pilbara to the cattle stations in Rockhampton. This has formed the basis of the strong economic bond between Australia and Japan. Japan is our biggest export market and has been for the last 40 years, with $32.7 billion worth of goods last year. We are the third biggest importer of Japanese goods—$17.4 billion worth. Overall, there is a two-way trade of $54.5 billion.

Japan is Australia’s largest export market for energy and the second largest export market for beef. We supply 87 per cent of Japan’s beef. The chances are that, if you are eating a steak in Japan, it will have come from one of our cattle farms in Rockhampton or in the Kimberley. This enduring economic cooperation was solidified over 50 years ago when the Commerce Treaty was signed in 1957. Since then, our economic ties have continued to strengthen, and this bill is evidence of that.

This new tax treaty with Japan enhances the existing bilateral tax arrangements between Australia and Japan, creating incentives for increasing trade and investment between our two countries. Already, Japan is Australia’s third largest investor, with an investment stock of $51 billion as at the end of 2006. This bill serves to further increase that investment. I congratulate the Minister for Foreign Affairs for signing the treaty in February this year, and I congratulate the Assistant Treasurer and Minister for Competition Policy and Consumer Affairs for introducing this bill into the parliament.

Australia and Japan have stood side by side on two major challenges that the international community faces. Australia and Japan have fervently supported efforts to eliminate nuclear weapons. There is a great onus on both countries to be champions of the Nuclear Non-Proliferation Treaty, the cornerstone of global nuclear disarmament. Japan carries the burden of being the only state to have experienced the consequences of nuclear weapons. Australia carries the responsibility of being the country with the largest known uranium reserves. We both have a unique perspective on nuclear disarmament and we share a common view on the importance of the Nuclear Non-Proliferation Treaty. Australia and Japan have stood solidly side by side on this issue.

The new global challenge of the 21st century is climate change. Climate change is the greatest moral, economic and environmental challenge of this century and, again, it is an area where Japan and Australia share many common views. The international community met over a decade ago in Kyoto with the objective of reducing greenhouse gases. It was an important first step towards a global emissions reduction regime. Like the Australian government, the government of Japan has acted decisively on climate change. In an address to the Japan National Press Club in June this year, former Prime Minister Fukuda said:

We must squarely face the current state of the global environment and, instead of repeating empty calls, step up real action that will actually reduce greenhouse gas emissions.

Japan has already provided real action on this issue. It ratified the Kyoto protocol in June 2002. There is a history of our two countries working together on climate change. Australia is Japan’s main source of coal and provides Japan with a quarter of its energy needs. We have also have been working together on clean coal technology.

The government has been working closely with Japanese car maker Toyota to start building hybrid versions of its Camry model at its factory in Victoria. In June this year, when the Prime Minister visited Japan, he announced a $35 million subsidy to Toyota. However, the partnership between Australia and Japan is not limited to economic, security and strategic ties. There are also very strong personal ties. In a speech the Prime Minister gave at Kyoto University on a recent visit to Japan, he said:

Our relationship is strong and our friendship is enduring.

Already, under this government, seven cabinet ministers have visited Japan this year. The Prime Minister has visited on two occasions. Australians and Japanese share equally strong ties. There are currently 64,000 Japanese residents in Australia, the fifth largest Japanese community outside Japan. In 2007, 570,000 Japanese visited Australia and 220,000 Australians returned the favour. Tourism is an area that continues to bind our two countries. In fact, it was through tourism that Australia gained arguably one of Japan’s greatest exports, Tetsuya Wakuda, the head chef at one of the top 10 restaurants in the world. Tetsuya grew up in Japan until the age of 22. Armed with his only piece of information about Australia—that there were lots of koalas and kangaroos around—and having only limited English he decided to travel to Australia, where he has stayed ever since. It is Japan’s great loss, but we have gained one of the world’s great chefs—and, I must admit, I am a big fan of Tetsuya’s restaurant.

Sister city relationships also increase our cultural bonds. Japan and Australia share 102 sister cities. One of those sister city relationships exists in my electorate. The Japanese city of Suita is the sister city of Bankstown. As part of this arrangement youth exchanges take place between the two cities, promoting cultural understanding and friendship between our next generations. I look forward to meeting the 20 local students who will be travelling to Suita on 4 October.

I also share a strong affinity with Japan. I am the chair of the Australia-Japan Parliamentary Friendship Group and I had the privilege of meeting the Japanese Ambassador to Australia, Takaaki Kojima, at the Japanese embassy earlier this year. It was an honour to meet him. In the short time he has been the Japanese Ambassador to Australia, just 10 months, he has done a fantastic job of strengthening the close ties between our two countries. In my role as the chair of the friendship group, I look forward to working closely with the ambassador and his team to continue to build on this strong and enduring relationship. As part of that, I will be visiting Japan in early October as a guest of the Japanese government. I thank the ambassador for his kind invitation. This visit will provide a great opportunity for me to gain a greater understanding of the importance of this significant relationship. I look forward to gaining a greater insight into the political, economic, strategic, security and cultural aspects of Japan.

This morning as I was driving to work, I saw what I think is the most visually symbolic example of the enduring friendship between our two countries. While driving along State Circle, here in the nation’s capital, I noticed that one side of the road was lined with cherry blossoms, the national flower of Japan. The other side of the road was lined with the golden wattle, Australia’s national flower. It is a symbol of the strength and closeness we share. This bill further embeds the bond our two countries share, and I commend the bill to the House.

Julie Owens (Parramatta, Australian Labor Party) Share this | Link to this | Hansard source

As I rise to speak on the International Tax Agreements Amendment Bill (No. 1) 2008, I would like to draw the House’s attention to the fact that the three government members listed to speak on this bill are all from Western Sydney. That is quite easy to explain: with a population of nearly two million people, Western Sydney is the third largest economy in Australia. With our population growing faster than the rest of the country, there is perhaps no more serious issue than increasing the economic strength of our communities. We will do that not only by how well we engage the skills, imagination and hard work of our own people, but also by how well we engage with the world. We are lucky in Western Sydney in that, in many ways, we have the world within us. The people who have migrated here have brought to this country their languages, knowledge and business experience and they are comfortable dealing with various parts of the world. We already have the world very much within us in Western Sydney. But our relationship with Japan, which has been strong and enduring over many decades, is one of the most important to us.

I have worked on this bill and read sections of it over the last week. As I have said several times when I have spoken on tax law, it is all a bit dry. In fact, it is very dry. I come from a music background, so I am looking forward to seeing a bill which I understand and which other people have to read three times! There are paragraphs in this bill where, quite frankly, I fell asleep before I got to the end of them. But what underpins it, the purpose of the bill, what it is actually about, is really quite fascinating and has grabbed my imagination as I have worked on it over the last week. The bill underpins an incredibly important relationship. What it deals with is how people make decisions to commit more to Australia, to commit more to the relationship with Japan, to invest, to trade and to essentially commit over the long term to building a stronger relationship. It looks at what barriers there might be, it looks at the complexities, it looks at the burdens of complying with two complex tax codes. It also looks at the needs of the people of both countries in supporting those relationships. It looks at whether the people with businesses who live and work in both countries are getting a fair deal out of the taxation arrangements. So underpinning all of this very dry legislation is an incredibly important process that Australia and Japan will go through in order to strengthen our relationship into the future.

The bill seeks to give force of law to a renegotiated tax treaty. The renegotiations began under the Howard government in 2007 and the new treaty was signed on 31 January 2008. It will replace what will soon become the old tax treaty, which was signed in March 1969 and came into effect on 1 July 1970. That is 38 years ago. During the 38 years of that treaty, the way that businesses think and work, the range of businesses in both countries and the way that business moves between the two countries with technology have changed quite considerably. So it is well and truly overdue that this incredibly important treaty, which underpins the growth of our relationship, be reviewed.

The new treaty will come into force 30 days after both countries have completed their domestic requirements. Japan have already met theirs. This bill is part of the process of Australia meeting our commitment. It inserts the text of the new treaty, which was signed in January this year, into the International Tax Agreements Act 1953 effectively replacing the old treaty of 1969. I hope I am speaking about this in English—I am actually trying very hard to keep this in understandable language. In order to allow the Australia-Japan tax treaty to come into effect, for the purposes of withholding tax from 1 January 2009 the bill needs to pass both houses of parliament and receive royal assent prior to 30 November 2008, so there are some time constraints on the House.

If you are a business or an individual straddling both countries, this is incredibly important and interesting legislation. It is important for businesses operating, or planning to operate, in both countries and trying to deal with the complexities of two tax systems and for the citizens of both countries to ensure that appropriate taxes are paid. The treaty is essentially about removing or reducing tax barriers to cross-border movement of people, capital or technology; tax barriers do apply to all three. It does this by relieving double taxation, preventing tax discrimination and providing certainty with respect to the tax treatment of cross-border income flows, thereby reducing the compliance burdens and excessive taxation on taxpayers and allowing businesses to get on with what it is that they actually do.

The new tax treaty will improve the integrity of the tax system—and, again, it is required after 38 years of change—and will promote cross-border trade and investment with one of our most important trading partners, Japan. You cannot underestimate just how important that relationship is and how important it has been over the last 40 years, not only because of the size of the money flow—and Japan is still our largest trading partner—but also because of its longevity and strength and the quality of the relationship between our two nations. The relationship is not one of a quick buck and it is not one of quick import and export; there are very real longstanding relationships and investments in capital in both countries that hold our relationships in very good stead.

Japan is Australia’s largest export market and it has played a central role in Australia’s postwar economic development. At the moment, China is likely to overtake Japan’s position as the primary export market, but the complementary nature of the Australia-Japan relationship, its longevity and the strength of our personal and business relationships will ensure that that relationship remains vital to both economies long into the future. In 2007 Japan was the world’s second largest economy, measured in US dollars, and the third largest economy, measured in purchasing power parity. Economic growth is expected to continue at the rate of 1.5 to two per cent over the next two years. Japan’s economy is driven by strong business investment and export growth, with strong regional demand providing considerable input.

Japan—this powerhouse to our north—became Australia’s primary export market in 1969, the same year that the old treaty was negotiated, and it continues in the No. 1 position today. In 2007 the two-way trade between our two countries was valued at $54.5 billion, accounting for a 0.9 per cent decrease on 2006. Trade between the two countries is largely stable as a result of the domination in our relationship by multinationals in the resources sector using very long-term supply contracts. Japan is Australia’s third largest source of investment—which, in 2006, was valued at $51 billion. Japanese investment has played a central role in Australia’s postwar economic development, particularly in the resources, manufacturing, auto and tourism sectors.

The Australian-Japan economic relationship is significant due to its historical and contemporary importance, and the two economies enjoy a highly complementary trade relationship and relative geographic proximity. It is a very strong foundation on which to build. Again, this bill ensures that people—and they are people and businesses that build this relationship—are working under the best circumstances in which to do that.

Stakeholders’ submissions which have been received are overwhelmingly supportive of this new treaty, particularly in relation to the 10 per cent withholding tax rate for dividends and the interest withholding tax exemptions. Submissions to the government’s tax treaty review largely suggested that the approach taken in the Japanese tax treaty be applied to future Australian tax treaties.

The Convention between Australia and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income does a number of specific things. Probably the most significant of these are summarised by the Joint Standing Committee on Treaties in report 91, which was tabled on 12 March 2008. It summarises the key differences between the 1969 Japanese tax treaty and the 2008 Japanese convention. I will just read into the record two of those paragraphs:

4.4 The Committee was advised that the proposed treaty is generally consistent with recent tax treaties concluded by Australia and includes a number of changes from the existing treaty. The key differences are reduced rates of withholding taxes (WHT) on dividends, interest and royalties, and improved integrity measures, particularly relating to rules for the exchange of information on tax matters. The treaty also introduces rules for real property which align the Capital Gains Tax treatment closely with that of the Organisation for Economic Cooperation and Development (OECD).

4.5 Treasury advised that it sought greater clarity in the revised agreement. The organisations that would be subject to exemptions for interests to withholding taxes have been expanded to include the Australian Export Finance and Insurance Corporation, the public authority that manages the investments of Australia’s Future Fund, the Japan Bank for International Cooperation, and Nippon Export and Investment Insurance.

The other key changes which were summarised in that report included the inclusion of anti-treaty-shopping provisions in relation to withholding tax rates on dividends, the inclusion of the comprehensive limitation on the benefits clause to ensure treaty benefits passed only to qualified persons and rules to prevent tax discrimination.

It is quite a complex bill. There are many people in the departments in both countries that have done substantial and really good quality work in a very complex area to put this treaty together. It has been incredibly well supported by stakeholders in the industry and it will, without any doubt, place this extremely important relationship between Australia and Japan in good stead to grow into the future. I commend the bill to the House.

David Bradbury (Lindsay, Australian Labor Party) Share this | Link to this | Hansard source

I rise to add my comments to this debate and to speak in support of the International Tax Agreements Amendment Bill (No. 1) 2008. The bill, once enacted, will implement into Australian law the taxing rights and obligations set out in the convention entered into earlier this year between the Australian government and the Japanese government—the Convention between Australia and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income.

This convention between Australia and another sovereign nation, Japan, is what is typically known as a double tax agreement. These arrangements are not only common for us as a nation to enter into but absolutely essential in the context of the global economy that we all now live within. What does a double tax agreement do? Essentially, a double tax agreement, or tax treaty, seeks to allocate taxation rights to the respective jurisdictions. Where gains are derived by individuals or entities, there will always be a desire on the part of a domestic jurisdiction to tax those gains. But in a global economy there needs to be some balancing of the desire of an individual jurisdiction to tax those gains and ensuring that individuals doing business across borders are not being taxed twice by two jurisdictions. A double taxation agreement is about the coming together of two nations to reach some agreement as to how gains derived by individuals and entities in those two contracting states are to be appropriately taxed so that individual taxpayers do not have to pay tax twice.

This is an essential element of having an open trading environment across the globe, and it is on that basis that we enter into many of these agreements on a bilateral basis. In most cases the terms of those agreements override the specific provisions of domestic taxation law in our country. It is worth noting that it is of particular importance in a case such as Japan that Australia modernise and update its arrangements with one of our most significant trading partners when it comes to taxation and our respective obligations and rights to tax individuals in respect of their gains. As a result of that recognition, the government has entered into that agreement and we are now implementing that agreement into domestic law through this bill.

As one of our key trading partners, Japan has been Australia’s largest export market for over 40 years, with bilateral merchandise trade totalling $54.5 billion in 2007. Japan is also Australia’s third largest investor, with a total stock of investment worth $51 billion at the end of 2006. It is also worth noting that Australia is the third largest exporter of food to Japan, and those exports are valued at more than US$4 million. In trade terms our relationship with Japan is a significant one. But not only do we have a strong relationship in trading terms; we also have a strong relationship at the diplomatic level as fellow international citizens.

A tax treaty is not only about allocating taxation rights between contracting states; it is also about ensuring that there is some mutual cooperation on stamping out practices that would challenge the integrity of revenue measures within each of those states. An essential part of this bill and the convention that it implements is that it strengthens some of those integrity measures. I think all members of this place would agree that that is a good thing.

I would now like to turn to some of the technical amendments contained within the convention. The new treaty provides that the dividends, interest and royalties paid from one country, which is defined as ‘the source country’, to a person who is a resident in the other contracting state will generally remain taxable in both countries but with limits on the tax that the source country may charge on the resident of the other country. In respect of withholding taxes relating to dividends, interest and royalties, a number of significant changes will be implemented as part of this convention.

In respect of dividends, under the existing treaty between the Australian and Japanese governments, which was signed back in 1969, the maximum withholding tax rate which may be imposed is 15 per cent. Under the new treaty, there are essentially four classes of dividends, which will be taxed in different ways depending on the nature of those dividends. No tax will be chargeable on intercorporate non-portfolio dividends where the recipient holds directly at least 80 per cent of the voting power of the company that is paying the dividend. This will be subject to certain conditions. There will be a five per cent rate limit, which will apply on all other non-portfolio intercorporate dividends where the recipient holds directly at least 10 per cent of the voting power in the company that is paying that dividend.

The treaty also contains a 15 per cent rate limit, which will apply to distributions from Australian real estate investment trusts. That 15 per cent limit will also apply to dividends which are paid by a Japanese company which is entitled to a deduction for dividends paid to its beneficiaries in calculating its taxable income in Japan where more than 50 per cent of that company’s assets consist of real property in Japan.

The fourth category of dividend, which will essentially be all of those other dividends that do not fit into any of the above three categories, will be subjected to a withholding tax rate limit of 10 per cent. This is a significant reduction in the withholding tax rates that apply to dividends across the board. I think this will clearly facilitate greater cross-border investment, both outbound and inbound. Clearly, the rationale of this bill is to enhance the already very strong economic relationship that we have with Japan.

In respect of interest, the ability of a source country to tax residents of the other contracting state will continue to be limited to 10 per cent. However, there are some alterations. No tax will be chargeable in the source country on interest derived by a financial institution resident in the other country, a body performing governmental functions, including central banks, the Australian Export Finance and Insurance Corporation, any public authority that manages the investments of Australia’s Future Fund, the Japan Bank for International Cooperation or Nippon Export and Investment Insurance. There are some safeguards that apply in respect of interest income earned from those particular entities.

In respect of royalties, the general limit for royalties will be reduced from 10 per cent to five per cent. This is a significant change that will drive much increased investment in Australia. The new treaty provides that amounts derived from equipment leasing—this area has been a matter of some uncertainty in the past—including certain container leasing, will be excluded from the royalty definition. They will be treated and dealt with under the international transport operations article, which is article 8, or under the business profits article, which is article 7.

In respect of the withholding tax that applies on royalties, intellectual property is one of the most significant assets to which royalties and royalty withholding tax will apply. We will see a greater capacity for our nations to share in some of the intellectual property that is generated and created in our respective states.

I would also just like to comment more specifically on some of the measures contained within the convention that seek to preserve the revenue base here in Australia. Specifically, the convention preserves our taxing rights over income from real property and income arising from activities related to our natural resources. There is a clarification of our boundaries in terms of resources. That is of particular significance in respect of resources contained within those expanded boundaries.

It is also worth noting that this convention enhances information exchange provisions which allow tax administrations of both of the jurisdictions to share tax information. This is an essential part of maintaining integrity in our respective tax systems but, importantly, those provisions will be extended more broadly to take into account the goods and services tax, which of course was not anticipated by anyone back when the original treaty was entered into.

All in all, there are a range of integrity measures that are included within the convention. The measures go a long way towards ensuring not only that we are bringing down some of those potential double-taxation barriers that exist and might act as a disincentive to further investment between the two countries but also protection and preservation of our revenue base.

There are a number of other features of the convention that are worth noting. Apart from expanding the list of taxes covered, there is a refinement of the definition of ‘permanent establishment’, including prescribed time limits for the creation of PE, permanent establishment, where an enterprise is engaged in the exploration for or exploitation of natural resources. A significant element of the convention is the provisions that relate to comprehensive alienation of property, which broadly align the capital gains tax treatment with OECD practice whilst preserving our taxing rights over Australian assets that have that physical connection with Australia. This is particularly important in relation to mining rights and other interests related to Australian real property.

There are special provisions that relate to a particular type of arrangement that exists with Japan involving sleeping partners—an expression that relates to the nature of the entities for taxation purposes and nothing else—which clarify the situation and take into account some peculiarities that exist in the legal and taxation arrangements within Japan. Importantly—and this will be an issue that provides much greater certainty to taxpayers in both countries—a time limit of seven years will be enshrined for the commencement of transfer pricing audits. But, ensuring the integrity of the system, there will be no such limit in the case of fraud or evasion, which is a very common carve-out in relation to time limitations in taxation matters. Fraud or evasion should never be matters that are protected by a time limitation.

Importantly, the convention also creates new rules to prevent tax discrimination against nationals and Australian businesses operating in Japan and vice versa. There is also a comprehensive limitation-on-benefits article to prevent abuse of the treaty—specific integrity provisions that seek to ensure that taxpayers are not able to avoid their obligations by relying upon these particular provisions within the convention.

That is a summary of some of the specific technical amendments that are contained within the convention. But it is worth reflecting more generally on the benefits of entering into this convention. Apart from the fact that, by reducing withholding tax, we are reducing the interest burden on Australian borrowers of Japanese debt—and I think we would all agree that that will certainly assist some of our companies looking to make inroads into various markets—there will be an expected increase in economic activity between Australia and Japan. That will be a natural by-product of streamlining the taxation processes and arrangements with respect to the two countries. That is a great thing and it will benefit our economy and much of the industry within it.

The cost of borrowing from Japanese lenders for Australian businesses will reduce, which will also assist many Australian businesses. The increased economic activity that is anticipated will lead to greater tax receipts in the long run. Taxation is one of those wonderful tools where, sometimes by reducing it and delivering a benefit to the economy, the revenue is able to recoup some of those reductions by way of additional tax receipts as a result of the benefit of that investment.

The benefits of encouraging foreign direct investment are plain to see for all of us. The introduction of new technologies, governance standards and management concepts will directly flow from the updating of this particular treaty. There will also be training and skill upgrading, improved productivity, increased imports and exports, increased competition, more efficiency and lower consumer prices. It is a fallacy to think that higher withholding taxes are in the end borne by the nonresident from the other contracting state. We all know that they are very quick to pass on the additional costs to the consumers. Many of those consumers are people in Australia securing those goods and services.

Regarding the impact of lower dividend withholding tax on foreign direct investment, the flows of foreign direct investment are highly sensitive to country tax rates. Therefore, we can expect an increase in foreign direct investment as a result of this legislation. OECD research shows that a one per cent reduction in tax rates leads to a 4.28 per cent increase in foreign direct investment inflows, which is a significant additional investment that we would expect to flow from some of the reductions that have occurred.

The benefits of a revised tax treaty include having a more modern and updated instrument that dictates these matters. That in itself is an end that should be supported. This particular convention removes some of the existing impediments to investment and trade between the two countries. Withholding tax removal prevents a lockup of profits offshore. As a result of these changes, we will see more Australian businesses doing business in Japan and vice versa. The benefits of that will be great for our national economy.

I want to reflect briefly on the press release issued by the Assistant Treasurer in relation to consultation regarding Australia’s tax treaties. Whilst the consultations involved tax treaties more generally, it is worth noting that a number of the comments that came back through the various stakeholders that contributed to this debate were very much in support of and praised the elements of the Australia-Japan tax treaty, particularly in relation to the need for lower dividend and royalty withholding tax rates. Clarification has been brought about by the provisions that deal with real estate investment trusts, or REITs. There is also the treatment of capital gains and bringing that treatment into line with OECD practice and the issue of transfer pricing and imposing a time limitation with the exception of where cases of fraud or evasion are to be considered.

In concluding, I want to bring this debate back to my local community and acknowledge the very strong friendship that the Penrith City Council has with a number of city councils and cities in Japan. Fujieda City in the Shizuoka Prefecture and Penrith City signed a sister city agreement back in 1984. A long and very strong friendship has emerged as a result of that agreement, which involves yearly student exchange programs—with more than 200 exchange students during the time since the agreement—and regular citizen exchanges. This has been of great benefit to both cities.

In addition, the Penrith City Council has a relationship with Hakusan City in the Ishikawa Prefecture. This friendship agreement was signed in 1989, extending beyond friendship and involving increasingly developed and closer economic ties between the two countries. No doubt these great relationships and Australia’s great trading relationship with Japan will only improve as a result of this convention. (Time expired)

Chris Bowen (Prospect, Australian Labor Party, Assistant Treasurer) Share this | Link to this | Hansard source

in reply—I thank the members for Stirling, Blaxland, Parramatta and Lindsay for their very worthwhile contributions to this debate on the International Tax Agreements Amendment Bill (No. 1) 2008. Responding to the needs of both Australian and Japanese business, the new Australia-Japan income tax convention comprehensively updates the existing tax treaty arrangements with Japan, which were last updated in 1969. The existing agreement no longer fully reflects the modern tax treaty policies of either country. The new convention, which will modernise and enhance the bilateral tax arrangements between Australia and Japan, was signed in Tokyo on 31 January this year. The bill will give force to the law of the new tax treaty with Japan by inserting the text of the new convention into the International Tax Agreements Act 1953 and repealing the existing treaty.

Tax treaties do facilitate trade and investment by minimising tax barriers between treaty partner countries. The importance of tax treaties is magnified where the relationship is as strong as that between Australia and Japan. So this is one of the more significant tax treaties that the parliament has considered in recent times. The new convention underlines the strength of the modern and sophisticated bilateral ties between the two countries and reduces obstacles to inhibit further corporate expansion into Japan.

Japan is Australia’s third largest investor. Direct investment by Japan continues to play a key role in the development of many Australian industries, including export industries such as car manufacturing and the natural resource development activities that have driven Australia’s export performance. Australia is now one of the largest recipients of offshore investment by Japanese mutual funds. From Australia’s perspective, Japan is the fourth largest destination of Australia’s investment abroad and it has been Australia’s largest export market for more than 40 years.

The new convention streamlines taxation arrangements between the two countries to the benefit of both economies. The key outcomes from the convention include: lower withholding tax rates on dividend and royalty payments for businesses looking to expand offshore and obtain access to valuable intellectual property, which the member for Lindsay referred to in some detail; specified interest withholding tax exemptions that will facilitate more competitive and accessible cross-border debt arrangements; and broadly aligning capital gains tax treatment with international practice and with Australia’s domestic law. The treaty also ensures Australia’s revenue base is appropriately protected by preserving taxation rights over income from real property and income arising from activities relating to Australia’s natural resources and by enhancing information exchange provisions which allow the tax administrations of both countries to share information—something particularly important in these times of heightened efforts to crack down on tax havens.

Public submissions received as part of the review of Australia’s taxation treaty—again this was referred to by my friend the member for Lindsay—and policy announced by the government earlier this year strongly supported the outcomes of this convention. Modernising, updating and reducing our withholding tax rates have of course been key economic priorities of this government. The new convention will enter into force 30 days after both countries advise that they have completed their domestic requirements, which in this case includes this process of passing the bill. The treaty has been considered by the Joint Standing Committee on Treaties—of which the member for Shortland is a senior member—which has recommended that binding treaty action be taken. I commend the bill to the House.

Question agreed to.

Bill read a second time.

Ordered that the bill be reported to the House without amendment.